If you run a limited company, one of the most common questions accountants get asked is: “How much should I pay myself?”
It sounds simple. It isn’t, but we can make it straightforward.
The short answer for most directors in 2026/27 is £12,570 per year (£1,048 per month). But the right answer for you depends on your setup. Here’s what you need to know.
Why salary matters more than you might think
As a director and shareholder of a limited company, you’re not stuck with just a salary. The most tax-efficient approach is usually a combination of salary and dividends, keeping your salary low to minimise National Insurance (NI), and topping up your income with dividends, which are taxed at lower rates.
But “keeping your salary low” doesn’t mean setting it to zero. There are real consequences to getting this wrong.
The three key thresholds for 2026/27
There are three salary levels worth knowing about. Each aligns with a different National Insurance or tax threshold:
Option 1 — £5,000 (the NI Secondary Threshold)
At £5,000, your company pays no Employer’s NI at all. Simple and administratively clean.
The catch? £5,000 falls below the Lower Earnings Limit (LEL) of £6,500, which means this salary won’t count as a qualifying year towards your State Pension. If building your pension entitlement matters to you, this option isn’t ideal.
Option 2 — £6,500 (the Lower Earnings Limit)
At £6,500, you get the State Pension qualifying year without paying any employee NI yourself. Your company will pay a small amount of Employer’s NI on the portion above £5,000 (around £225), but you keep your pension record intact.
This is a reasonable middle ground if you want to keep NI costs low but still protect your State Pension entitlement.
Option 3 — £12,570 (the Personal Allowance / Primary NI Threshold)
This is our recommendation for most directors, and here’s why:
- It uses your full tax-free personal allowance, so no Income Tax is due
- It sits at the Primary NI Threshold, so no employee NI is due either
- It counts as a qualifying year for your State Pension
- The salary is a corporation tax-deductible expense, reducing your company’s tax bill
Yes, your company will pay Employer’s NI of approximately £1,136 (15% on the portion above £5,000). But here’s the maths: that employer NI, along with the salary itself, is deductible for Corporation Tax. At a 19% Corporation Tax rate, the combined saving is around £1,654, more than offsetting the NI cost. At higher Corporation Tax rates, the saving is even greater.
Does it change if you have more than one director or employee?
Yes, and this is important.
If your company has two or more employees or directors on the payroll (each earning above £5,000), you may be eligible for the Employment Allowance. In 2025/26, this increased to £10,500, meaning your company’s first £10,500 of Employer’s NI is wiped out.
In that case, two directors each taking £12,570 would generate combined Employer’s NI of around £2,271, easily covered by the allowance. Even better value.
If you’re the sole director with no other employees, you cannot claim Employment Allowance. You’ll pay the full £1,136 in Employer’s NI. But as the maths above shows, it’s still the most efficient option overall.
What about dividends?
Once you’ve taken your salary of £12,570, any additional income should usually come as dividends (assuming you’re also a shareholder and the company has distributable profits).
It’s worth being aware that dividend tax rates are increasing by 2% from April 2026 for basic and higher rate taxpayers, which narrows the gap between taking dividends and taking salary. For 2026/27 the rates are:
- 10.75% (basic rate)
- 35.75% (higher rate)
- 39.35% (additional rate)
The tax saving from dividends is therefore less dramatic than it once was. That said, dividends still offer something salary can’t: flexibility and control. You choose when to take them, and you only draw them when the company has profits to support it. That’s a genuine advantage for managing your personal tax position year to year.
A few things to bear in mind
The £12,570 approach works well for most directors, but it might not be right for you if:
- You have other sources of taxable income (rental income, employment elsewhere)
- Your total income falls between £100,000 and £125,000, where the personal allowance tapers away
- You have a contract of service as a director, which would require you to pay at least the National Minimum Wage (typically higher than £12,570)
- You’re at pension age and don’t pay employee NI, as different rules may apply
- You’re the higher earner in a household claiming Child Benefit. The High Income Child Benefit Charge kicks in once your income exceeds £60,000 and tapers to a full clawback at £80,000. How you structure your salary and dividends can affect where you land in that range, so it’s worth factoring in if this applies to you
There’s no one-size-fits-all answer. The right salary and dividend mix depends on your specific situation.
The Shapes view
Good tax planning isn’t about finding loopholes. It’s about understanding the rules and making them work for you. Paying yourself a salary of £12,570, backed by dividends, is a well-established and HMRC-compliant approach that most owner-managed businesses use.
If you’re not sure whether your current salary level is right, or if your circumstances have changed this year, we’re happy to talk it through.
Get in touch with the Shapes team at shapes.team
